TY - JOUR
AU - Christoffersen,Peter F.
AU - Diebold,Francis X.
TI - Financial Asset Returns, Direction-of-Change Forecasting, and Volatility Dynamics
JF - National Bureau of Economic Research Working Paper Series
VL - No. 10009
PY - 2003
Y2 - October 2003
DO - 10.3386/w10009
UR - http://www.nber.org/papers/w10009
L1 - http://www.nber.org/papers/w10009.pdf
N1 - Author contact info:
Peter Christoffersen
Professor of Finance
Rotman School of Management
University of Toronto
105 St. George Street 447
Toronto, ON, M5S 3E6, Canada
Tel: 416-946-5511
E-Mail: Peter.Christoffersen@rotman.utoronto.ca
Francis X. Diebold
Department of Economics
University of Pennsylvania
3718 Locust Walk
Philadelphia, PA 19104-6297
Tel: 215/898-1507
Fax: 212/573-4217
E-Mail: fdiebold@sas.upenn.edu
AB - We consider three sets of phenomena that feature prominently and separately in the financial economics literature: conditional mean dependence (or lack thereof) in asset returns, dependence (and hence forecastability) in asset return signs, and dependence (and hence forecastability) in asset return volatilities. We show that they are very much interrelated, and we explore the relationships in detail. Among other things, we show that: (a) Volatility dependence produces sign dependence, so long as expected returns are nonzero, so that one should expect sign dependence, given the overwhelming evidence of volatility dependence; (b) The standard finding of little or no conditional mean dependence is entirely consistent with a significant degree of sign dependence and volatility dependence; (c) Sign dependence is not likely to be found via analysis of sign autocorrelations, runs tests, or traditional market timing tests, because of the special nonlinear nature of sign dependence; (d) Sign dependence is not likely to be found in very high-frequency (e.g., daily) or very low-frequency (e.g., annual) returns; instead, it is more likely to be found at intermediate return horizons; (e) Sign dependence is very much present in actual U.S. equity returns, and its properties match closely our theoretical predictions; (f) The link between volatility forecastability and sign forecastability remains intact in conditionally non-Gaussian environments, as for example with time-varying conditional skewness and/or kurtosis.
ER -